Li & Fung first-half revenue misses estimates

KathyChu

Li & Fung Ltd., a key middleman in the global apparel supply chain, reported first-half revenue that fell short of consensus estimates and warned that U.S. and European retail sales are likely to remain "challenging."

The Hong Kong-based company, which works with 15,000 factories globally to supply goods to major U.S. chains including Target Corp. and Wal-Mart Stores Inc., said Thursday that its revenue increased 3% to $8.71 billion in the first half, slightly below the consensus estimate of $8.73 billion from S&P Capital IQ.

Meanwhile, the company's net profit rose 16% during the first half, and operating profit slid 9% because of higher expenses from hiring employees and opening new offices.

Li & Fung Chief Executive Spencer Fung said the company is "making the necessary investment in people and infrastructure" so that it can cross-sell more services to customers.

Li & Fung's earnings are seen by analysts as a loose indicator of the U.S. retail sector's health. U.S. retailers have yet to see a strong pickup in sales, despite a recovering domestic economy, and are gearing up for challenging back-to-school and holiday shopping seasons.

The company, in a filing with the Hong Kong Stock Exchange, warned that key brands it works with are "delaying order decisions until they get better indications about consumer confidence." The result is that, while Li & Fung has visibility in its orders for the crucial back-to-school and early holiday seasons, it remains unsure of orders for the fourth quarter and spring seasons, it said.

Market conditions are expected to remain challenging, according to Li & Fung, after general weakness so far this year in European and U.S. retail sales, and uncertain political and macroeconomic conditions.

Li & Fung's sourcing business has traditionally focused on Europe and the U.S., but the company is expanding in Asia and elsewhere to capture an increase in consumer buying power. Li & Fung currently gets about 60% of its revenue from the U.S., 18% from Europe and 22% from other parts of the world.

Li & Fung has also been focusing on simplifying its business model. Analysts had criticized the century-old company for becoming too complex, and said they found it hard to predict the company's earnings with accuracy. Li & Fung's original business model was to contract with factories to make goods for retailers, but over the years, the company expanded into product design, marketing and licensing.

This year, the middleman spun off its brand-licensing business and started up a safety-and-operations consulting unit. The brand-licensing business, Global Brands Group, reported Thursday an operating loss of $63 million for the first half because of acquisitions, on revenue of $1.35 billion.

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